Worst might be behind for power sector: Feedback Infra

 

Most analysts believe that the power sector is showing signs of revival. Vinayak Chatterjee, Chairman, Feedback Infra says there are three major reasons behind it. One, there is revival in new power plants' business, which means orders for constructions and capital goods. Two, all leading discoms have increased tariffs and even on financial restructuring - many of the front-line states have actually succeeded in placing their state government guaranteed bonds for discom bailouts. Finally, there is news that the government may allow coal as a pass-through for older projects, make arrangements for imports and reset the power tariffs of Tata Power, Mundra. All this combined will give a big push to the sector, he says.

He also spoke about BHEL and the core sector at length. He does not think orders have dried up completely in the core sector.

Below is the verbatim transcript of Vinayak Chatterjee's interview on CNBC-TV18.

Q: Of late while we have seen some of the stocks in the power sector do well, but quite clearly the investment is still lacking. By when do you see any kind of turnaround in this particular space?

A: As you have rightly said the power sector is showing signs of a turnaround. Most analysts covering this sector are using the phrase that the worst is behind us and there are good reasons for that. Few things have happened simultaneously. One, there is revival in the new power plants' business, which means orders for constructions and capital goods. There are two Ultra Mega Power Projects (UMPP) for which the bids are out; another two are planned. There are states like Rajasthan, Madhya Pradesh and Tamil Nadu that are putting out state bids for new power plants, so there is eager anticipation from the capital goods sector that the orders from all of this will soon start impacting their order books positively. Point two, India has 54 distribution companies (discoms). Out of these the leading ones are doing two things - one they have significantly increased tariffs. There are major steps at the local level to take hard decisions on transmission and distribution losses and the other issue is that even on financial restructuring many of the front-line states have actually succeeded in placing their state government guaranteed bonds for discom bailouts, what is called Financial Restructuring Plan (FRP) package in terms with the banks and are getting their financials in order which means that the discoms will soon be in a position to buy far more power than they have demonstrated in the last few months because of their own cash flow and liquidity problems. Finally the government's view on allowing coal as a pass-through for older projects and consistently revising the bids that are coming out now that universally makes fuel as a pass-through, including arrangements for imports and hopefully resetting the power tariffs of Tata Power , Mundra, etc. all these positive messages have come from the government and finally we are seeing green shoots of the solution to the gas problem where the Power Ministry has floated a cabinet note for discussions on gas pooling of both imported and domestic glass. If you see Power Grid and other people's performance on transmission there is a huge activity that has happened in terms of linking of various transmission grids and the big one that we are expecting now is the linkage of the southern grid around July 2014. When you add up all of this you will find that they all add up to increasing a positive mood in the power sector.

Q: The point you have made is actually quite concurrent with what Bharat Heavy Electricals ( BHEL ) said yesterday as well. Despite the first half being so dismal they have guided for a second half which will be better in terms of order inflows. Would that be what we could expect and if in case that is what will come through in the second half will margins be affected because of extreme amount of bidding between private and public companies for the selective number of orders that could come through?

A: Both your points are correct. The fact that most capital goods manufacturers are looking forward along with BHEL to a revival of the order book, thanks to the spate of new plants likely to come through is certainly in the air. I remember, BHEL's financial performance that is being widely commented in the space today, I have tracked this sector over many years and come to the conclusion that it takes about two years for a downturn to hit the profit and loss account of these companies because of the momentum of carry over orders. It is now after two years after the slowdown that the momentum of carry forward orders has actually come down and therefore you cannot book revenue on that account anymore and you are looking for fresh orders. BHEL is not anymore in an envious position - of being virtually a sole supplier to the capital goods in the power sector because over the years significant high quality capacity has come in, whether it is L&T-Mitsubishi, BGR-Hitachi or Bharat Forge with its joint venture partner and many others who are in the market to supply capital goods and all of them universally have order books which are stressed. So when these spate of orders come in you are right in your observation that margins are likely to be wafer thin and we will once again have to wait for a larger pipeline of orders to come once most people's order books are once again back to normal levels. In the present, yes it will be a dogfight and margins are going to be wafer thin, but then people are right now concerned about getting their cash flows and their factories and their shop flows back coming again. That is really the expectation.

Q: What about the core infrastructure space? You spoke about BHEL. What has really surprised market over the last three months is L&T and the kind of numbers that they came out with. What do you think is happening in the core infrastructure space?

A: In the core infrastructure space it is not that orders have dried up completely. L&T is a very well diversified company. L&T's overall figures are a mix of various issues which is capital goods, regular engineering projects and domestic and international. So it is diversified enough to be able to take shocks that may hit one sector or the other and I think L&T is better off than many other capital goods companies wherein everybody is expecting a revival. So far as core sector is concerned we have just finished the discussions on power, road sector I must say that the momentum that one had expected to pick up before or around Diwali has still not happened, because we were expecting National Highways Authority of India (NHAI) to issue around this time close to about 4,000 kilometers of projects half on Build-Operate-Transfer (BOT) and half on Engineering, Procurement and Construction (EPC) and a few on annuity, but these projects are still to come out and while inside information is that they are almost ready and off the shelf ready to hit the bidding stage, but we have still not seen it, if that happens which I am expecting to happen in the next one or two months you may actually see over and above power the road sector once again also powering the mood uptick. Other than that there are fairly largish construction projects that are coming out from the dedicated freight corridor west and the beginnings of it from the dedicated freight corridor east - there are railway projects, there are urban metro projects. So it is not that the sector has dried up completely. What we are witnessing really is a public expenditure driven construction-led revival. That really sums up the mood in the infrastructure segment.

 

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According to Feedback Ventures, a significant uptick in the power sector ahead…

An interview of Mr. Vinayak Chatterjee, Chairman Feedback Ventures by CNBC-TV18 on the outlook of Indian Power Sector…

 

 

 

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Vinayak Chatterjee, chairman, Feedback Ventures told CNBC-TV18 that he expects to see a significant uptick in the power sector in the next three-four months.

“Out of the number of problems that plagued the infrastructure sector, the reason for hope is that the political leadership has prioritized solving the power conundrum,” he said.

Below is the edited transcript of Chatterjee’s interview with CNBC-TV18. Also watch the accompanying videos.

Q: There was a time a few weeks back where all of us were getting more hopeful because the PMO was getting involved. There were a few statements about speedy clearances of projects etc. But subsequently in the weeks that have followed have your hopes been belied?

A: Not really. We should keep up the hopes for the simple reason that out of the number of problems that plagued the infrastructure sector, the reason for hope is that the political leadership has actually prioritized solving the power conundrum. There are very, very senior bureaucrats in the PMO and other places who have been requested to focus on the power sector.

So whether it is the huge level of interaction with Coal India or calling all the state electricity boards to discuss how to reduce their losses and clean up their balance sheets, there is a lot of background work is going on. So I am still hopeful, while we may have missed the 31st March deadline which was originally proposed, I am hopeful that in the next two or three months there would be a significant uptick in the power sector.

Q: The fuel supply agreements (FSAs) are still stuck, a lot of the power companies seem quite unhappy about the new penalty clause and the ball has gone back to the PMO’s court to try and see how they can resolve it because the power companies and Coal India are not seeing eye-to-eye on that, do you think there will be a resolution?

A: There will be, I think there is no question. We just have to live through this stage of game playing if I may put it that way because we are in a bit of an existential dilemma vis-à-vis Coal India. On the one hand, since it is virtually a monopoly, it is expected to be in public service but post listing it often acts and behaves as if it is a private company.

Clear signals have been given in terms of how it is expected to behave in the national interest. I suspect as soon as this little bit of game playing is over between Coal India and the private sector, I am personally confident that much of the resolution will be in favour of the coal users.

Q: Do you think its Coal India that we will have to blink on this accord?

A: Coal India will have to blink.

Q: What exactly is happening with the power companies in terms of their performance anyway? Yesterday one of the private companies indicated that merchant trades have actually improved significantly, but it’s not showing through in terms of their performance yet. It doesn’t look like they have gotten back to the PLFs (Power Load Factors) they had in the past?

A: Merchant rate is a very peculiar animal for the simple reason that it’s a buy versus power cut decision. Towards the en of the fiscal when they all are focused on their balance sheets they resort to large amounts of load shedding. When you resort to large amounts of load shedding you buy less power.

When you buy less power the merchant rates fall. In the beginning of the fiscal, I suspect for various reasons as soon as the buying by the DISCOMs and the consequent reduction of load shedding happens merchant power rates go up. Partly because some of the power plants are going in for maintenance and some have low coal stocks etc. I wouldn’t read too much into merchant power rates going up in the long-term in the months ahead.

Q: What is happening with the other parts of construction, any headway at all because the quarterly numbers don’t seem to indicate there is anything happening in terms of fresh inflow of projects?

A: That is true. It has been well recorded by channels like you as well as the print media, the business papers, a simple statistic tells the tale. For example, the lead indicator in the infrastructure sector is the order book of L&T.

If you read the results yesterday, L&T has very candidly said that their order booking last fiscal was 15% lower than the previous year. That tells you the story that there isn’t enough investment happening to keep the order books of the infrastructure and construction companies in robust health and that is the truth and the reality that we are facing right now.

Q: This brings us to the problem of confidence, because three months back when we spoke we were getting hopeful that maybe because of what the government is saying confidence in CEOs engaged in infrastructure projects might pick up. But it’s actually gone down. If you talk to people today they are saying, we are not investing and that’s showing up in every number in new investments that records economic activity in terms of the investment cycle. Do you see any pick up at all from people that you speak to or are people still very morose?

A: To be frank, the mood is pretty morose and gloomy, but if you look at the two broad sectors, roads is not doing too badly. As per the latest figures, between national highway and state highways, if you add both these segments, India is doing close to about 10 kilometers odd a day, roughly about 3,000-4,000 kilometers per year. It’s not a bad pace.

I wouldn’t crib right now about the road sector, forget the fact that we haven’t done 20 kilometers a day. But 10 is not bad. With this hope on the power sector saying that look if the highest people in the land from the PMO to the cabinet secretariat to coal to power all of them are putting their heads together and trying to get the whole sector cleaned up in terms of fuel linkage as well as the distribution companies, I think the mood that I have gauged from a lot of power CEOs is that they are happy that this focused attention is being given.

Although we are unhappy that it is not being resolved as quickly as we would want it to be, but the fact is that there is so much political and bureaucratic bandwidth going into attacking the problems that there is hope for this sector. But as we are all agreeing that it could have happened earlier.

Q: Also on the liquidity side i.e. the funding side, a lot of people brush that off saying that sorted but it doesn’t seem sorted in terms of how high interest cost still are for some of these companies, the fact that they still do not have access to additional capital?

A: To my mind, the cost of capital today is a less worry than the overleveraging of the balance sheets of practically every infrastructure development construction company. This is part of a larger shift. When across the last 10 years, companies that had very little debt on their books because they were EPC contractors, and/or equipment supplies went into the PPP BOT business.

This means that they had to from their own balance sheet put up a huge level of money upfront, which you recover across 20 years or 30 years. What you see is that extremely high debt leveraging of the balance sheet of development and construction companies. Now that high level of debt has made further financing difficult. This is because from the receiver side, you have hit the capacity of balance sheets to borrow more and from the banking side and from the lending side you have hit many corporate and sectoral caps.

I would worry less about the cost of capital right now as the availability of capital, the ability of financial institution and banks to disburse a fresh clean loans and the ability of the system to absorb more debt. There is somewhere in the system, there has to be a deleveraging.

This deleveraging is also apparent because you will notice that most development companies or infrastructure construction companies are doing two things. Either they are going for CDR or asst sale where a number of their SPVs, their owned assets in roads and power I are in the market. You can see this phenomenon of deleveraging happening. This process needs to carry on till we get back to financial windows being opened once again.

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